WASHINGTON STATE INVESTMENT BOARD

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTASSET STEWARDSHIP & SUSTAINABILITY FOR THE LONG TERM

PUBLISHED APRIL 2020

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are o en material to investments, and increasingly investors are seeking the data and measurements to be er assess these factors.

Here are a few of our ESG-related highlights from 2019: During 2019 and prior to the 2020 collapse of the broad

energy sector, the WSIB’s investment exposure to fossil fuels dropped to 4.8 percent of total assets from 6.5 percent of total assets – a reduc on of 24.6 percent exposure in a single year.

By 2019 nearly all of the WSIB’s investments in coal were strategically sold due to forward-looking views of the energy sector. Residual exposure to coal as of year-end 2019 was a mere 0.03 percent of total investments.

Our in-house fi xed income investment team has been a net-seller of oil and gas holdings. Their trading resulted in an overall net sell-off of $745 million of oil and gas securi es in 2019.

In renewable energy, the WSIB has invested $736 million in companies that earn all revenue from renewable sources of electricity. We also have invested in u li es and other enterprises where a signifi cant por on of business is derived from renewables.

Our real estate program is inves ng in rela vely aff ordable and stable middle-income housing, along with commercial/residen al proper es that are close to public transporta on hubs.

Our tangible assets program has invested in solar/wind power genera on, along with agriculture that emphasizes smart water management.

We created a new full- me posi on of Sustainability Offi cer, an experienced professional who will be integral to our Investment Commi ee and our investment process.

I hope this summary provides you with a clear sense of the WSIB’s direc on and commitment when it comes to the intersec on between investments and ESG issues. Be assured that our emphasis will con nue to be on investment strategy and fi nancial results, while we will leave the demands of fi scal policymaking to our duly elected offi cials. At the same me, our Board and staff will con nue to treat long-term sustainability as a centerpiece in our investment program.

Sincerely,Theresa Whitmarsh, Execu ve Director

THE LINK BETWEEN SUSTAINABILITY AND LONG TERM INVESTMENT SUCCESS

For long-term investors like the Washington State Investment Board (WSIB), the links connec ng asset stewardship, sustainability, and successful investment outcomes are familiar concepts. We are seeing increased data, resources, and technology-enabled informa on to improve investors’ ability to incorporate factors related to sustainability into all aspects of the investment process.

Given the devasta ng human and fi nancial toll of the COVID-19 pandemic in 2020, we know that markets and companies, now more than ever, will be evaluated based on leadership capabili es, vital human capital issues, impact on communi es, and the long-term sustainability of business models. This epic health challenge has become an all-too-realis c stress test for both humankind and our capital markets.

This report outlines the WSIB’s most recent ini a ves and outcomes related to environmental, social, and governance (ESG) issues. The WSIB is though ully advancing its ESG work in order to con nue its successful inves ng in context of today’s evident ESG risks and opportuni es.

Our investment approach is working. The WSIB’s investment program ranks as a top-decile performer among comparable public pension plans in the country for virtually all me periods. Since its incep on, the Commingled Trust Fund has earned 8.8 percent annually as of year-end 2019. We believe we have the necessary liquidity and investment discipline to respond to unpredictable economic declines as seen in 2008-2009 and now in 2020. Our benefi ciaries recognize and appreciate this resilience and focus, especially in mes of unse ling market vola lity.

To sustain this success, we will evaluate factors such as climate risks, social issues, and shi ing governance prac ces at corpora ons. As we have seen, external issues

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The WSIB’s ESG Program now consists of two vital programs, a long-standing asset stewardship eff ort and a newly established ESG integra on and measurement ini a ve. These programs each include internal and external responsibili es based on the need to address ESG issues. In sum, the framework allows the WSIB to address ESG issues in full alignment with its fi duciary duty.

Our ESG programs and our investment disciplines are gradually evolving to refl ect Board policies, improved data availability and gradually developing standards in the investment industry.

WSIB’S ESG FRAMEWORK

ESG PROGRAM FRAMEWORK

ASSET STEWARDSHIP Proxy vo ng Engagement with companies Industry engagement on

corporate governance ini a ves

INVESTMENT PROCESS

INDUSTRY ADVOCACY

ESG INTEGRATION Standards evalua on Mapping/measurement

methods Input to due diligence and

por olio management

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Beyond simply inves ng into markets, the WSIB must act as a responsible steward for the assets that ul mately belong to our benefi ciaries. Part of this responsibility involves addressing our priori es on ESG issues through the fundamentals of corporate governance:

Proxy vo ng on issues that pertain to public companies Evalua ng and vo ng on issues raised by shareholders Engaging with industry groups that share our interests and views Engaging construc vely with the companies in which we invest Watching out for our benefi ciaries’ interests as new rules and regula ons take shape

In 2019, the WSIB voted in a total of 3,058 shareholder mee ngs. WSIB cast votes on a total of 26,832 individual proxy proposals dealing primarily with:

Elec on of directors Ra fi ca on of auditor Advisory votes on execu ve compensa on Frequency of say on pay (say when on pay) Shareholder proposals (SHPs) Other corporate issues, including equity compensa on plans

and mergers/acquisi ons

In order to maximize the impact of our resources and our investor voice, our Board has approved several topical priori es that guide the WSIB’s proxy vo ng and engagement prac ces.

Shareholder rights and long-termismWe support proposals that will help ensure construc ve shareholder input to companies, especially when such input encourages company management to focus on long-term growth rather than short-term valua ons.

Diversity of boards and company managementWe have strengthened our vo ng policies around a general belief that diversity on company boards and management teams is in the best long-term interests of companies and investors.

Climate issuesWe o en support proposals that seek improved disclosure and repor ng of risks associated with long-term climate change. We assess these issues on a case-by-case basis, and evaluate a company’s exis ng repor ng and progress, relevance to the industry, and emerging standards for climate impact.

OUR PROXY VOTING RECORD

SHARPENING OUR PROXY VOTING PRIORITIES

ASSET STEWARDSHIP PROGRAM

Where the WSIB Casts Its Votes

Ra�fica�on of Auditor 9.8%

Say on Pay 8.4%

Say When on Pay 1.0%SHPs 1.9%M&A 0.7%

Other 10.3%

Elec�on of Directors

67.9%

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During 2019, the WSIB has taken a new lead role on engagement with two Washington state-based companies in conjunc on with a broader Climate Ac on 100+ eff ort.

In this role, the WSIB co-signed a specifi c le er on climate lobbying, asking targeted U.S. companies to align their lobbying ac vi es with the aims of the Paris Agreement, including through their core trade associa on rela onships. This was modeled on an earlier European ini a ve. This focused outreach campaign is rela vely new in the U.S. market, and the Climate Ac on 100+ has partnered with Infl uenceMap to track progress.

In our limited but direct engagement with companies in our region, we are encouraged that both of our engagement companies responded to this campaign with ini al wri en responses to our requests. We intend to track progress on this over me.

In order to best represent the long-term interests of our benefi ciaries, we believe engagement on ESG issues can be far more eff ec ve than simply alloca ng capital to or away from par cular companies or market sectors. Our engagement work is done on two levels: with select companies and more o en with collec ve industry organiza ons that are aligned with our mission and beliefs.

During 2019, the WSIB launched its fi rst direct engagement eff orts with a careful selec on of Washington-based corpora ons. The company mee ngs were part of the WSIB’s work with Climate Ac on 100+, a group dedicated to addressing and reducing global carbon emissions.

Other highlights of 2019 engagement eff orts: We called on the world’s top public company greenhouse gas emi ers to take real ac on on climate in alignment with

the aims of the Paris Agreement. The WSIB joined more than 450 investors represen ng more than $40 trillion in assets under management, as part of the Climate Ac on 100+. This helped to construc vely raise climate-related issues on a global scale.

We urged public companies to improve diversity on corporate boards. The WSIB co-signed 237 le ers as a part of the Thirty Percent Coali on’s “Adopt-a-Company” campaign. The message from investors focused on improving diversity beyond a one-dimensional focus on gender.

We joined the members of the Council of Ins tu onal Investors by speaking out on vital regulatory proposals that threaten to weaken our corporate governance and proxy vo ng prac ces.

We spoke out at industry gatherings to express our views and raise ques ons about how ESG factors should become integral to fi duciary duty rather than being in confl ict with such duty.

In 2019 and into early 2020, the WSIB evaluated ESG service providers such as MSCI and Sustainaly cs to be er understand how such pla orms may inform both our asset stewardship work and our ESG integra on eff orts (see next sec on).

We also strengthened our focus on ESG-related ques ons and issues as part of the WSIB’s ongoing evalua on of investment managers and partners.

ENGAGEMENT IN ACTION

ENGAGING WITH COMPANIES AND THE INVESTMENT INDUSTRY

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Looking ahead, the WSIB plans to stay on pace with this focus on sustainability by pursuing: Preserva on of independent strategic thinking within our asset class teams Though ul integra on of ESG factors within the investment process Deliberate research to determine how ESG metrics complement investment strategies The WSIB in 2020 became a member of the Sustainability

Accoun ng Standards Board (SASB) in an eff ort to increase ESG data access and to evaluate material ESG factors that may inform the investment process

Development of a mapping and analysis framework to measure ESG risk at a total por olio level

Con nued alignment with WSIB’s mission and investment beliefs

Over me, this approach will allow the WSIB to remain commi ed to maximizing returns at prudent levels of risk while working to be er integrate ESG factors into a successful investment program.

The WSIB’s investment process considers the risks and opportuni es associated with ESG. In 2014, the agency formally adopted an investment belief calling on companies, fund managers and investment partners to disclose an cipated risks associated with climate change. These disclosures have become a regular part of the WSIB’s investment process.

Along with analyzing performance, people and investment process, our investment offi cers consider how various investments and investment managers will perform when faced with the uncertain externali es of ESG factors.

INVESTMENT BELIEFAdopted by the WSIB on September 18, 2014

The WSIB has a long investment horizon and therefore is subject to complex and systemic global risks that unfold over me, including fi nancial risks resul ng from global climate change. Many of these risks are diffi cult to quan fy, but nevertheless, we consider all iden fi able risks in our investment process and believe though ul considera on of these evolving global challenges is inseparable from long-term investment strategy and performance.

A NEW ROLE FOR SUSTAINABILITY

WHERE TO FROM HERE

INTEGRATING ESG INTO INVESTMENT PROCESS

In 2019, the WSIB increased its commitment to focusing on ESG integra on by crea ng and fi lling a new posi on of Sustainability Offi cer. This new investment offi cer will be integral to the WSIB’s Investment Commi ee and will focus specifi cally on the emerging metrics and measurements that can help determine how ESG factors may infl uence or aff ect long-term investment decisions.

How will commercial enterprises create effi cient supply chains and reduce waste to gain compe ve advantage? Which energy companies are best equipped to benefi t from a shi from fossil fuels to renewables? How will technology companies balance the value of user data versus the need for user privacy? Which investment managers or partners are paying a en on and eff ec vely strategizing around these issues?

More than ever, these ques ons are seen as material to investment performance. The combina on of new technologies and a growing recogni on of ESG factors within the investment community means that sustainability is becoming bigger part of the conversa on among those managing companies and those managing investment assets.

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A MESSAGE FROM OUR NEW SUSTAINABILITY OFFICER

Throughout my career working in ins tu onal investment management, my focus has been on delivering value-added performance to clients, doing so with non-nego able integrity. It is with this lens that I am approaching my role as Sustainability Offi cer at the WSIB.

In my fi rst year in this newly created role, my objec ves are both bo om-up and top-down. First, I will work closely with asset class teams to learn their current approach to inves ng and suggest ways to improve their bo om-up ESG integra on eff orts in a way that is addi ve to their own investment process. Second, I will work with our Investment Commi ee and other internal teams to create eff ec ve ways to review ESG exposures at a total por olio level. Over the long run, this can help inform strategic asset alloca on and por olio risk management.

I am grateful and excited for the opportunity to be part of the WSIB’s eff ort to create and improve upon sustainable investment processes that will benefi t public employees for years to come.

Warm regards,Sherrie Trecker, CFASustainability Offi cer

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KEY ISSUES Climate change risks Energy sector transi on: fossil fuels and renewables Management of natural resources (water/air quality) Repor ng and tracking of environmental factors

OUR STRATEGIES Engage with companies and investment managers Vote proxies and evaluate relevant shareholder proposals Collaborate with like-minded peer funds and industry groups Evaluate company data disclosures and response to issues Explore environmental factors for materiality to investment decisions Invest via due diligence on fi nancial and non-fi nancial risks

MEMBERSHIP ORGANIZATIONS CERES Climate Ac on 100+ CDP (formerly Carbon Disclosure Project) Sustainability Accoun ng Standards Board (SASB)

OUR RESULTS Assessing climate-related risk within the investment process Suppor ng majority (90%) of climate change-related shareholder proposals Calling for SEC direc on on disclosure standards Employing due diligence ques onnaires and manager/partner disclosures Priori zing climate risk in our engagement eff orts Launching research into materiality of ESG factors in and across our asset classes

FUTURE AIMS Reduce carbon emissions through focused engagement Advocate clear, measurable and consistent standards for addressing climate-related investment risks Evaluate investment risk and opportuni es amid the transi on of the energy sector

ENVIRONMENTAL SUMMARY

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KEY ISSUES Diversity Workers’ rights and safety Labor rela ons Supply chain management Income inequality CEO/workers’ pay ra os Execu ve compensa on

OUR STRATEGIES Engage with companies and investment managers Vote proxies and evaluate relevant shareholder proposals Collaborate with like-minded peer funds and industry groups Evaluate company data disclosures and response to issues Explore social factors for materiality to investment decisions Invest via due diligence on fi nancial and non-fi nancial risks Infl uence the industry via select thought leadership and outreach

MEMBERSHIP ORGANIZATIONS The 30% Percent Coali on Coali on for Inclusive Capitalism Interna onal Limited Partners Associa on (ILPA) World Economic Forum (WEF) Focusing Capital on the Long Term (FCLT Global) Sustainability Accoun ng Standards Board (SASB)

OUR RESULTS Advocacy for SEC direc on on standards Governance/board-level oversight of these issues Increased engagement among investment managers and partners

FUTURE AIMS Evalua on of response/resiliency to COVID-19 pandemic crisis Advocate for clear and consistent standards for addressing socially driven investment risks

SOCIAL SUMMARY

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KEY ISSUES Shareholder rights Board independence Mul -class vo ng rights Majority director elec ons Proxy access/universal ballots Proxy-related regula ons

OUR STRATEGIES Engage with companies and investment managers Vote proxies and evaluate relevant shareholder proposals Collaborate with like-minded peer funds and industry groups Evaluate company responses to issues Explore governance capabili es for materiality to investment decisions Invest via due diligence on fi nancial and non-fi nancial risks Infl uence the industry via select thought leadership and outreach

MEMBERSHIP ORGANIZATIONS Council of Ins tu onal Investors (CII) Investor Stewardship Group (ISG) Interna onal Corporate Governance Network (ICGN) Focusing Capital on the Long Term (FCLT Global) World Economic Forum (WEF) Millstein Center Sustainability Accoun ng Standards Board (SASB)

OUR RESULTS Increased company uptake in majority vo ng/proxy access Protected shareholder vo ng rights; limits on mul -class structures Enhance shareholder-company rela ons based on common growth objec ves

FUTURE AIMS Lead collabora on across the value chain to promote responsible advancement of governance prac ces

GOVERNANCE SUMMARY